Ch06 - Accounts Receivable - Chapter 6 Sales revenue,...

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Chapter 6 Sales revenue, Receivables and Cash Revenue recognition Deductions from sales revenue Accounting for bad debts Cash – Bank reconciliations 6-1
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Revenue recognition 6-2
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Revenue Recognition Revenue is recognized when realized and earned – usually at point of sale. SEC Staff Accounting Bulletin 101 states that revenue can be recognized when the following criteria are met: 1. Delivery has occurred or services have been rendered (FOB destination or shipping point). 2. There is persuasive evidence of an arrangement for customer payment. 3. The price is fixed or determinable. 4. Collection is reasonably assured. 6-3
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Delivery – FOB Shipping Point 6-4 Proctor & Gamble Buyer responsible for inventory while in transit. Title passes when shipped; revenue recognized.
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Delivery – FOB Destination 6-5 Proctor & Gamble Title passes at destination; revenue recognized. Seller responsible for inventory while in transit.
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Revenue Recognition – Disclosure Revenue recognition : Sales are recognized when revenue is realized or realizable and has been earned. Most revenue transactions represent sales of inventory… Our policy is to recognize revenue when title to the product, ownership and risk of loss transfer to the customer, which can be on the date of shipment or the date of receipt by the customer. The revenue recognition policy must be disclosed in the footnotes. For example: 6-6
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Revenue Recognition – Disclosure Revenue recognition : We recognize net revenue when the earnings process is complete, as evidenced by an agreement with the customer, transfer of title, and acceptance… Because of frequent sales price reductions and rapid technology obsolescence in the industry, we defer the revenue and related costs of sales from sales made to distributors under agreements allowing price protection and/or right of return until the distributors sell the merchandise. .” Intel Annual Report 6-7
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Revenue Recognition & Creative Accounting Example: Article on Foremost McKesson What did they do? Example: Crazy Eddie’s 6-8 Proper Fraud Record revenues in period earned Timing differences: usually premature recognition Fictitious revenues
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Revenue Recognition & Creative Accounting Causes of fraudulent financial reporting: Aggressive targets of financial performance. Failure to attain that target would be viewed as unforgivable. Journal of Accountancy, March 2001 Misstatements occurring most often: 50% revenue recognition 10% purchase accounting, liabilities, accounting estimates 6-9
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Deductions from sales revenue 6-10
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Deductions from Sales Revenues Rather than reduce sales revenue directly, “contra-revenue” accounts are used so that management can monitor these transactions: “Contra revenue” accounts. Normal balance is a: 6-11 Income Statement (partial) Sales revenue $ 10,000 Less: Sales discounts 100 Sales returns and allowances 300 Credit card fees 40 Net sales $ 9,560
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Ch06 - Accounts Receivable - Chapter 6 Sales revenue,...

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